Allot is a leading provider of deep packet inspection (DPI) technology helping telecom carriers to better monitor and control data traffic. DPI solutions enable carriers to identify and throttle down bandwidth "hogs" and manage traffic at the application level, such as by blocking or charging extra for access to applications like Skype, that cause congestion in the network leading to poor quality of service.
Allot is a provider of DPI solutions and could be a key beneficiary of growth in wireless data traffic, proliferation of smartphones and deployment of higher order wireless networks.
Price Objective Basis & Risk
Allot is still early in its life cycle with wireless deployments only ramping up meaningfully the last two years. Op margins have grown substantially in the last 2 years, going from losses to high teens in the recent quarter. With 75% gross margin, operating margin upside is quite substantial, with 25% mark being an achievable target, in our opinion. As a result, we deemphasize P/E analysis and use EV/Sales instead. Our $19 PO is based on roughly 3.7x 2014 EV/Sales comparable to the other high growth companies in our space: F5, Aruba, Sourcefire and Fortinet.Risks to our PO: Deep packet inspection is still a nascent market, the question remains whether DPI functionality will require a standalone appliance or can be another function on a router. The issue with net neutrality (esp in the US market) remains unresolved. Allot has high customer concentration, and could see variability in its revenue stream given carrier spending risks and associated lumpy spending given the nature of these big projects. Earning leverage must come from top line growth given the already high gross margin. We also flag spending issues in Europe, as EMEA represents about 50% of total revenue.